The economy needs more stimulus

The stimulus measures announced by the government in five tranches are a mix of immediate relief, regulatory changes and some structural change. These are welcome as they are. However, the economy needs something more: a big step-up in demand. What is the point of throwing a lifeline to a drowning man, if he is to be left tottering on the edge again? The government has left room for more expenditure, making much of the stimulus announced so far by means of leveraging of bank finance through strategic guarantees and subsidies from the exchequer, rather than straight away through budgetary subventions.

That room must be used to invest in large measure —in a massive expansion of the healthcare infrastructure, in building, perhaps, a new town or two. Also developing a corporate bond market brooks no delay. Even before the COVID pandemic hit us and the lockdown killed economic activity, the economy had been slowing, suffering from low levels of capital formation. Also, the banking sector had ceased to mediate capital, constrained by both a pile-up of bad loans and a penal culture attending on banking risk with minimal confidence in GoI’s reported assurances of a cultural change. The stimulus does not address these problems directly. True, the provisions for guaranteed investment in investment-grade bonds of finance companies, and partially guaranteed investments in sub-prime debt instruments of finance companies and small business has a limited potential to create some tradable debt. But this is not nearly enough. An RBI-funded, state-sponsored vehicle must pick up debt issued by AA- or BBB-rated companies, to create volumes and create a culture of trading, instead of holding the debt to maturity, as happens now.

Inviting Indian industry into flights to outer space will not create tangible investment in the short term. That calls for determined completion of stalled real estate and infrastructure projects, and new large projects. Such investment will create the demand that all levels of industry need, to create jobs, income, taxes and investor confidence.

This piece appeared as an editorial opinion in the print edition of The Economic Times.